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Murray Says Market Reaction to Fed Comments Exaggerated

Aug. 27 (Bloomberg) -- Bank of Canada Deputy Governor John Murray said investor reaction to comments about tapering of monetary stimulus by the U.S. Federal Reserve may have been overdone because there are signs the process will be smooth.

“The pronouncements appeared to trigger an exaggerated reaction in financial markets,” Murray, 64, said in a speech today in Kingston, Ontario. “A number of factors are working in favor of a smoother transition,” he said.

The Fed’s debate over when to slow $85 billion in monthly bond buying has roiled financial markets from Jakarta to Mumbai to New York. Some policy makers have said the purchases, while helping reduce unemployment, are stoking excessive risk taking in assets such as junk bonds and leveraged loans.

The market reaction is surprising because the Fed is discussing a slowing of the pace of stimulus instead of a rapid tightening and surveys show investors had already anticipated such a move would happen later this year, Murray said.

The reaction to the prospect of Fed tapering and higher interest rates may have been reflected in Canada as foreign investors sold a record C$19 billion ($18.1 billion) of bonds in June, an Aug. 16 Statistics Canada report showed.

Central bank leaders may be able to curb the negative consequences of exiting from extraordinary stimulus by linking the pace to clear signs of economic recoveries, Murray said.

Policy makers can tailor the pace of their actions to local circumstances, and have learned lessons about the importance of clear communication on how they will scale back stimulus, Murray said.

Not Publishing

The Bank of Canada isn’t planning to add to its communications by publishing a forecast for its policy interest rate, Murray said.

“You can see the logic, but I think under normal circumstances, there is a debate in the community about whether it comes with some costs,” he said. A central bank forecast can create “a false sense of commitment” to investors about plans that are “conditional, iffy,” he said.

Canada has benefited from Fed stimulus that boosted demand for exports, Murray said, and the lasting rebound that’s coming will more than offset the drag of higher interest rates as the U.S. central bank withdraws stimulus.

“Stronger external demand, coupled with downward pressure on our currency and support for commodity prices from a global economic recovery, will provide the lift,” Murray said.

To contact the reporters on this story: Theophilos Argitis in Ottawa at; Greg Quinn in Kingston, Ontario at

To contact the editor responsible for this story: Chris Wellisz at

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